Fed Minutes Spook The Market
The Fed Minutes caused stocks to fall on Wednesday which is unusual because normally the market ignores the Minutes. Minutes are usually elongated policy discussions that get wonkish. They are a month old, so they don’t often bring anything new to the table. However, in this case they did because the Fed appeared to modestly change its tune on yield caps and no timetable was given on targets. This stock market is so reliant on the Fed, even a minor change can cause it to fall. It's unlikely that the Fed was trying to scare the market.
Some members simply didn’t think these policies would work. This is like how the Fed isn’t going to cut rates below zero. Fed is willing to do whatever it takes to stimulate the economy. It's moderately ridiculous that the market would selloff on this news because investors don’t know what will work either. Fed can spook the market by discussing how overbought it was. Instead these comments were all it took to spark a selloff.
Details Of The Minutes
Fed harped on the need for a fiscal stimulus. We know that’s true. We can all hope the Fed’s words convince Congress to act as many small businesses and unemployed people are in trouble. Most people in Congress want a stimulus. They just don’t want it badly enough to compromise to get it. Therefore, the Fed’s advice will fall on deaf ears. Up until the tax cut and this year’s stimulus, the Fed had been making up for a lack of fiscal policy support.
Now the Fed finds itself in a similar predicament. However, the Fed is already doing whatever it can, and the economy is in much worse shape than it was in from 2010 to 2016. As you can see from the chart below, 73% of Americans said they support a stimulus and 15% said they don’t support one. This is a politically popular position to take. Hopefully, it gets done in September.
Let’s move on to what moved the market. Yield caps are when the Fed controls the long end of the curve, capping rates at a certain level. The issue is rates are already low. Frankly, the concept that the 10 year yield is too high and needs to be capped is laughable. The Fed stated, “Of those participants who discussed this option, most judged that yield caps and targets would likely provide only modest benefits in the current environment, as the Committee’s forward guidance regarding the path of the federal funds rate already appeared highly credible and longer-term interest rates were already low.”
Targets are when the Fed says it won’t raise rates until specific economic metrics are hit. For example, the Fed can say it won’t hike rates until core PCE inflation hits 2%. Problem with that is the Fed pretty much implies that policy already. Fed already has proven to markets it won’t hike rates for at least the next couple years.
Essentially, the Fed’s guidance can’t get any more dovish. Fed always has more tools in its chest. It just doesn’t know if these tools will work. It’s also unlikely that the Fed will need to be extremely dovish now that asset prices are doing well. Policy should try to help unemployed workers and small businesses. That’s best done by fiscal policy.
Fed stated, “providing greater clarity regarding the likely path of the target range for the federal funds rate would be appropriate at some point.” This would be an “outcome based approach” with specific goals. The market probably thought the Fed would unveil those goals in the Minutes or soon after. Saying it will happen ‘at some point’ was disappointing.
11 States Are Getting Benefits
Only a few states are giving out the extra $300 in unemployment benefits from the federal government. It’s now up to 11 states. 1 state, South Dakota, decided to reject the money. This is starting to go quickly as 7 states were approved on the weekend and the other 4 were approved this week. It would be great to see a big state get approved as it has been small ones so far.
None of the top 10 most populous states made the list. Therefore, if there is going to be economic weakness caused by the lack of benefits, it’s still going to show up in the data. Investors will become more bullish on the economy once more than half of the top 10 biggest states get approved.
Wednesday COVID-19 Update
Yet again, the number of new COVID-19 cases fell as there were 44,957 on Wednesday. That’s down from 54,385. The number of active cases has finally started to fall. There were also fewer deaths, but it’s still fairly high. There were 1,263 new deaths which was down from 1,386 last Tuesday. This decline pushed the 7 day moving average down from 1,047 to 1,030.
At that rate, it will fall below 1,000 this week. It would need to fall much faster next week to get there. However, that shouldn’t be a stretch if deaths follow cases. We can expect there to be a 3 week delay in cases impacting deaths, which would mean a big decline in deaths should start soon.
Conclusion
Fed disappointed the stock market even though the policies it considered wouldn’t have necessarily helped stocks. The stock market is so reliant on the Fed, it will sell off at the faintest hint of hawkish guidance. Growth investors think they are buying great companies that will grow forever, but they are actually betting on dovish Fed guidance.
The more states giving out the $300 in weekly benefits, the better. COVID-19 cases have declined all month. Investors are looking forward to it falling below the April peak soon. The 7 day average of deaths has been stubbornly high. Hopefully, it follows new cases and starts plummeting either this week or next week.
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